FMCG margins improve, but rural stress weighs

Margins of select fast moving consumer goods companies have started to recover for the first time in five quarters with decline in raw material costs, but rural growth continues to drag behind urban numbers and rupee depreciation remains a key concern, companies and analysts said in quarterly updates.

Packaged goods maker Dabur said in a quarterly update on Thursday that demand trajectory has shown "marginal improvement across urban markets" but rural markets are yet to fully recover. "Green shoots are expected in the form of moderating inflation, improving consumer confidence and increase in government spending," the company, which makes Vatika shampoo and Real juice, said.

The company said demand trends in both rural and urban India have seen a slight improvement, but fall short of a full recovery, citing near-term consumption pressures, and forecast mid-single-digit revenue growth.

Pick-up in demand in rural markets, which contribute close to half of annual sales of most packaged goods companies, is crucial for overall recovery of the sector.

Cinthol soap maker Godrej Consumer Products said growth trends are improving sequentially in its March quarter business update, adding steady demand has led to volume and value growth. The domestic branded business has registered volume and value growth in the teens with both home care and personal care witnessing double-digit volume and value growth, the company said.

While declining commodity costs for some categories are leading to higher operating margins, not all segments are seeing sales growth recover, analysts said. "Improving product mix and easing inflationary pressures would aid margins further in FY24 across the board. But pace of rural recovery and rupee depreciation could negate raw material deflation - both remain key variables worth monitoring," Nuvama Institutional Equities wrote in a report on Wednesday. "Players with greater exposure to rural are likely to turn in a muted performance," the report said.

The report noted that margin profiles of some consumer companies have started improving year on year, adding that with the gross margins expanding, companies have begun to ramp up ad spends.

On Thursday, the Reserve Bank of India projected marginal easing in retail inflation to 5.2% in the current fiscal, from its projection of 5.3% in February. But RBI governor Shaktikanta Das said inflation outlook remains dynamic as crude oil prices surged.

Parachute hair oil maker Marico forecast stronger margins for the March quarter and added that gross margins are expected to expand and "drive reasonable growth" with falling raw material prices. "The sector continued to witness gradual recovery with year-on-year volume trends, improving in each quarter," Marico said, in its March quarter update. The company said it expects consolidated year-on-year revenue in the quarter to grow in low single digits.

Amnish Aggarwal, head of research at Prabhudas Lilladher wrote in a report: "Domestic demand is showing green shoots, however untimely rains and changing weather patterns may delay rural recovery."